The Chinese Economy Introduction

Since the implementation of the Open Door Policy and economic reforms, economic growth in the PRC has been rapid. Graph depicts economic growth in the PRC since the 1950s, and presents a corresponding view of Australia's economic growth patterns. Fluctuations in the growth rate of the PRC's national income are closely related to domestic political conditions and campaigns. Graph illustrates clearly the effects on the PRC's economy of the Great Leap Forward from 1958 to the early 1960s - with a negative economic growth of over 20% for the year 1962 alone. Also dramatically illustrated are the effects of the Cultural Revolution, with 1968 showing a negative growth of almost 8%. The 1962 and 1968 represent times of particularly serious political and economic turmoil within the PRC. Graph also illustrates clearly the effects of Deng Xiaoping's economic reforms and the Open Door Policy, with a dramatic increase in activity especially during 1978. The only other year where such considerable economic activity was evident - apart from the years following the Great Leap Forward and the Cultural Revolution - was in 1984. 1984 showed particularly high growth and was a year in which the PRC's economy went into overdrive. As a reaction to the increases in spending during 1984, a tightening of monetary policy in an effort to slow down economic growth followed 1985. 1988 was another year in which the PRC's economy went into overdrive, and was followed yet again by a tightening of monetary policy that has continued until present day. Since the implementation of the new policies in 1978, the PRC's growth rate of national income and national income per capita has accelerated at an annual average of 8.7% per year.
Annual the Income 1988) Growth in PRC's National (1953-

Rates Exchange
The PRC has a dual currency system. The value of the local currency - Renminbi (RMB or Yuan)- is fixed by the People's Bank of China on the basis of movements in a mixed basket of the currencies of its major trading partners. The RMB is nonconvertible, and its export is prohibited without official permission. Purchases of imported goods are permitted only in special stores in exchange for foreign exchange certificates (FECs). Incoming tourists are handed FECs in exchange for their foreign currency at Chinese banks, and can illegally convert them into local RMB on a private basis at a price considerably more than their face value. Devaluation of the RMB however has eroded the difference in value between it and the FECs from approximately 2:1 in 1984 to 1.05:1 in 1991. Since the early 1980s, the RMB has undergone significant devaluation. In 1981, the exchange rate for the Yuan was 1.705 per $US, whereas in 1990, the Yuan stood at 4.722 per $US. The chart depicts the fall of the Yuan compared to other Asian currencies since 1980. In real terms, the Yuan has lost more than 60% of its value. Consequently, the PRC's exports have become increasingly attractive in international markets, more expensive commodities manufactured by its competitors. Changes in Real Exchange Rates for Selected Countries

The PRC's Financial System

The PRC's financial system is highly regulated and relatively underdeveloped, but has recently begun to expand rapidly as monetary policy becomes integral to its overall economic policy. As a result, banks are becoming more important to the PRC's economy by providing increasingly more finance to enterprises for investment, seeking deposits from the public to mop up excess liquidity, and lending money to the government. As would be expected, the PRC's banking system is also highly regulated with six major banks, each having specific tasks and duties. The People's Bank of China is the largest bank and acts as the Treasury. It also issues currency, monitors money supply, regulates monetary organizations and formulates monetary policy for the State Council. The Bank of China manages foreign exchange transactions and manages foreign exchange reserves. The China Investment Bank distributes foreign capital from a variety of sources, and the China International Trust and Investment Corporation (CITIC) was previously a financial organization that smoothed the inflow of foreign funds, but is now a full bank, allowing to compete for foreign investment funds with the Bank of China. The People's Construction Bank lends funds for capital construction projects from the state budget, and finally the Agricultural Bank of China functions as a lending and deposit taking institution for the agricultural sector. Financial reform in the PRC's banking sector include the introduction of leasing and insurance, and operational boundaries are being slowly eroded to promote competition for customers who are now permitted to choose banks as well as hold accounts in more than one bank.

Since the inception of the open door policy, a number of international banks have been permitted to open their doors in major cities in the PRC. However, these are largely representative branches, with only a few being permitted to carry out branch functions in Shanghai and Shenzhen. Their participation in the PRC's financial system has been very limited, but as the PRC starts to borrow more from abroad, their role may become greater in the future.

Foreign Investment
The PRC's 'Four Modernizations' programme has resulted in an effort to attract foreign investment and the promotion of joint ventures with foreign enterprises and governments. Four SEZs have been established in Guangdong and Fujian provinces, which aim to attract direct foreign investment to wholly owned or joint venture concerns to encourage technology transfer and boost exports and employment. As an incentive to attract greater foreign participation in PRC enterprises, the government provides tax holidays and exemptions from import restrictions. SEZs are not the only method that the PRC government has employed to attract foreign investment however, as cities such as Shanghai, Dalian, Guagzhou, Tianjin and Beijing have been allowed to employ policies similar to the SEZs to attract foreign investors. Hainan Island previously under the jurisdiction of Guangdong province - was made a separate province in 1988, and in effect functions as a free trade zone. In 1990, the Pudong development zone -similar to an SEZ - was established in Shanghai. PRC encouragement of foreign investment has not been successful has the government would have hoped, however. Political instability mainly as a consequence of the Beijing massacre, corruption and general bureaucratic inefficiency have all hindered greater foreign participation in the PRC's economy. In a bid to assuage Western fears of investing in the PRC, the government has been adopting patent laws and signing investment protection and taxation treaties.

The PRC's Industry Structure

Domestically, modernization and economic growth has been the focus of the reformist policies introduced by Deng Xiaoping, and in attempting to achieve this, the leadership has implemented the Four Modernizations Programme that lays special emphasis on the fields of agriculture, industry, education, science and technology, and defense.

In the countryside, the 'responsibility system' has been implemented and basically represents a return to family farming. Under this system, families lease land for a period of up to thirty years, and must agree to supply the state an agreed quota of grain or industrial crops at a fixed low cost in return. The remaining surplus can either be sold to the state or on the free market. As a result, peasants have been increasing their agricultural output in response to these incentives. Together with the responsibility system, there have also been a number of reforms relating to rural businesses - especially in the spheres of commerce and manufacturing. The increase in personal income bought about through the responsibility system has led to a burgeoning of small-scale enterprises that remain completely in private hands. As shown in Graph 2, the PRC's economy is characterized by a large share of industry - standing at 61.2% of total GDP in 1990 - with a smaller share of 24.4% devoted to agriculture and a much smaller service sector constituting only 14.4% of GDP. Such a constitution of GDP is a reflection of the Soviet influence of a planned economy since the 1950s. The current dominance of the industrial sector in the PRC's GDP constitution has not always been the case however, and it has been largely through governmental intervention that this evolution has taken place.
Sectoral Share of the PRC's GDP (%)

Since the 1950s, trend from the

the away

agricultural sector toward industrialization has been dramatic, and is a result of both policy changes and free market mechanisms. During the 1950s and 1960s, heavy industry received most attention and consequently grew twice as rapidly as agriculture. After the reforms of

1978, more attention to the agricultural sector as well as a move away from heavy industry toward light resulted in agricultural output almost doubling with only marginal increases for industry. The contrast between pre-1978 and post-1978 policies toward industry and agriculture is depicted in the Table below.
Percentage Change per annum in Gross Output value 1952-78 GOV GVAO GVIO Light Industry Heavy Industry 6.8 3.6 9.2 7.6 11.2 1979-87 9.8 9.7 9.4 10.7 8.2

The role of free market forces has also been instrumental in altering China's sectoral make-up. After 1979, the forces of supply and demand meant that consumers could play a greater role in determining which crops would be planted. This had the effect of making more profitable the planting of such crops as fruit, vegetables and tea. As a consequence, however, traditional grain crops have suffered, as farmers prefer to plant the more profitable cash crops. Increases in light industrial production and more profitable crops bought about by the loosening of market controls have not always been enough to satisfy consumer demand, which in turn has lead to inflation. Rather than increased demand being met with increased supply, the PRC's manufacturing sector and economic infrastructure are still too underdeveloped to supply a population of over one billion people with the commodities they want or need. Instead, a 'dual track' pricing system has arisen which has promoted arbitrage between official and free-market prices for the same commodities. Inflation and the unavailability of consumer goods have made some commodities too expensive for ordinary Chinese workers, as well as resulting in a general decline in living conditions. Another factor arising from inflation in the PRC has been corruption among the higher echelons of the CCP. Managers of factories in regulated industries usually high-level Party cadres - have been selling factory produce on the free market at grossly inflated prices. Inflation and corruption had become so embedded in the system by 1988, that the leadership was forced to take some drastic economic measures. In response to the general economic malaise, Li Peng - Prime Minister of the PRC - adopted several austerity measures in the middle of 1988.

The primary goal of these measures was to reduce economic growth and included such measures as limiting joint ventures, curtailing capital investment, tightening fiscal and monetary controls, reimposing centralized control on local construction projects and cuts in capital investment. The PRC's current eighth Five Year Plan - 1991 to 1995 - reflects the goals of slowing the economy down to a manageable level after the excesses of the late 1980s. The growth rate of GNP is planned to average 6% per annum, and government investment will be drawn away from national construction programmes towards agriculture, transport and communications. However, similar to the economic malaise in Australia where the government-induced economic slowdown evolved into recession, the PRC economy also showed similar signs of stagnation. Although eighteen months of austerity measures had lowered inflation to 2.1%, after eighteen months of rising unemployment, stagnation of industrial output and a breakdown of the financial system because of debt defaults, the PRC government was forced to loosen the economic screws in the middle of 1990. Increased investment into capital construction programmes and Township and Village Enterprises (TVEs) was the PRC's solution to reviving its economy. However, by mid-1991 signs re-emerged that the PRC's economy was about to overheat once again. Rises in industrial production within TVEs of 32% for the first half of 1991, refusal to heed calls for curbs on investment capital construction in the provinces as well as the re-emergence of double-digit inflation. The rapid growth of early 1991 indicated that the PRC government is still going to have to struggle further with enforcing its economic policies.

Direction of Trade
China's distribution of foreign trade is focused primarily upon the Capitalist countries. Obviously, this is because it is mainly the Capitalist countries that have the funds and technology which China needs for its industrialization - the most notable examples being Japan, the US and Hong Kong. Along the way to industrialization, the PRC has established trading contacts with most countries - regardless of ideology. During the 1970s and most of the PRC's period of economic reforms until the mid-1980s, Japan has remained the PRC's largest trading partner. Since then, the PRC's major trading partner has become Hong Kong - the major reason being that the PRC is Hong Kong's major source of food. Hong Kong also represents the PRC's

major link for indirect exports, as well as the point of sale for goods processed or assembled in the PRC - including textiles and light industrial goods.

International Trade After 1978

Exports
After the PRC government adopted the open door policy in 1978, its foreign trade grew rapidly as exports rose to promote economic growth and pay for the increased volume of imports. Among the results of the open door policy, therefore, was a rapid increase in trade volume, a gradual shift in trade composition due to greater Chinese flexibility in economic policy and a continuing tendency to conduct the overwhelming majority of its trade with partners from capitalist countries. The PRC's exports have climbed from 13.48 billion yuan in 1976 to almost 200 billion yuan in 1989, while imports have grown from just under 13 billion yuan in 1976 to over 220 billion yuan in 1989. Although exports have been increasing in volume, since 1985 their share of GDP as remained relatively constant at about 10%. Whereas exports have been the major contributor to Taiwan's 'miracle growth' constituting an average of 45.5% per year to GDP since 1985 - the same dependency on exports does not apply for the PRC. In fact, compared to other Asian nations, the PRC has not improved upon its ranking of ninth in 1985. While other Asian nations have been forging ahead with exports therefore, the PRC was in relative stagnation. The changes in Chinas commodity composition of exports have been a reflection of changes in the country's national output. In 1978, about 51% of China total exports were mineral and agricultural products. In the ensuing years, their share has gradually decreased to 44% in 1985 and 27% in 1989. The decrease in importance of agricultural products in the PRC's exports has occurred as a result of the increase in importance of minerals and lower-end manufactures.
The PRC's Commodity Composition of Exports

The higher proportion of industrial products amongst the PRC's exports is an indication of past industrial development. Graph 3 illustrates, however, that the large increases in agricultural output discussed previously have been largely consumed domestically, and have hardly made a dent on the PRC's export market. The rapid increase in income in the PRC has subsequently led to more being spent domestically on food. The PRC's major export commodities today are textile related, constituting approximately 25% of total exports. While there has also occurred a substantial increase in the PRC's export of electronics and electrical machinery, their standing still remains very low in comparison to clothing and petroleum. Middle and higher-end manufactures - such as electronic goods, telecommunications and sound recording equipment, and miscellaneous manufactures - which dominate Taiwan's exports, are still lagging far behind in the PRC. Lower-end manufactures - such as clothing and yarn - and primary commodities - such as petroleum and vegetables - are still the mainstay of the PRC's exports.

Imports
In contrast to Taiwan, where imports form an average of 32.5% of GDP, imports constitute an average of only 11.8% of the PRC's GDP. Obviously, the reason behind the difference in figures is that the PRC being much more well endowed with natural resources than Taiwan does not have to import the same amount of raw materials for remanufacture. The PRC has an abundant supply of most metals and minerals. It possesses huge deposits of ferrous and Ferro-alloy minerals that

supply a major iron and steel industry. At the moment, the PRC is a significant exporter of tungsten, antimony, tin and mercury, and amongst its major metal imports are copper and aluminum. The PRC is also the worlds fourth largest fuel producer, after the US, the (ex) Soviet Union and Saudi Arabia, and supplies are also adequate for domestic consumption. Coal is still the major source of energy in the PRC, and provides over 70% of its needs. The PRC is the world's largest coal producer, and is likely to dominate the world's future coal trade. This problem has also led to the situation where output is still expected to lag demand by more than 120 million tonnes by the end of the century. Therefore, while the PRC has the potential to dominate world coal trade, this may not occur for quite a long time. Since the inception of the Open Door Policy, the PRC government has placed highest priority on the import of capital goods and advanced technology. The PRC's imports today are concerned with economic development and are mainly composed of raw materials - such as iron and steel, industrial machinery, or semi-finished products required in the manufacturing process. Although China's foreign trade has grown quickly, it has been a rough journey with many swings and fluctuations in import purchases, leading to constant threats of balance of payment deficits. The main cause of such wild swings in the PRC's imports can be attributed to the government's inability to regulate foreign trade, mainly in reference to its poor planning and the decentralization of import purchasing.
The PRC's Commodity Composition of Imports

Just after the introduction of the open door policy, imports of advanced technology and equipment were very important, and a large number of complete sets of plant equipment were purchased. However, during the early 1980s, as the government became increasingly aware of huge trade deficits, imports of such commodities and consumer items were cut. In the mid-1980s though, another blowout in imports was greeted with further cutbacks in the import of industrial and manufactured goods. Graph 4 illustrates this up and down trend of the commodity composition of PRC's imports. Since the mid-1980s, the government has continued to place restrictions on consumer imports while placing major emphasis on increasing its productive capacity with foreign capital and technology. Within the category of capital goods, the importation of machinery has grown faster than any other material - booming so much that the austerity measures of the late 1980s called for a cutbacks on their importation. However - as previously mentioned - the PRC government's efforts to get the economy moving again after a period of stagnation has led to another blow-out in the import of capital goods, but the government's efforts to control yet again their importation has been largely ignored by the provinces, and the blow-out continues. Today, over 30% of the PRC's imports are capital goods devoted to capital investments in the manufacturing sector. Also as a result of increased production in the agricultural sector, the import share of food and live animals has been decreasing steadily. However, it is likely that this is only a temporary phenomenon, as growth rates in the agricultural sector will probably decline in the future. The initial increase in growth rates was mainly a result of an increase in incentives to produce more. Once farmers are producing at their maximum, growth rates for agriculture will probably decline, and as population increases and arable land continues to disappear, agriculture in China will dwindle even further.

Chinas Foreign Trade

China's foreign trade has basically shaken off the negative influences from the Asian Financial Crisis, and regained a high-speed growth. TOTAL VOLUME OF EXIM US$ 345

EXPORTS US$ 182

IMPORTS US$ 163

High-speed growth of foreign trade is attributable to both the various kinds of policy measures taken by the Central Government to promote the development of foreign trade, and to the comparatively favorable environments of the domestic and international markets. It is the result of the joint action of various kinds of factors.

Current Situation of Development of Foreign Trade In China

There are various characteristics of the current foreign trade in China 1. Fast-speed growth of imports and exports There has been a simultaneous growth in the imports and exports. Also they have set high records on both the fronts. 2. Exports to traditional markets and imports from major markets Asia, Europe and America have remained the traditional markets of Chinese exports. There has been an all round pick up of speed of exports to these traditional markets. It has helped to shake-off of China's foreign trade from the influences of the Asian Financial Crisis. Also there has been an overall growth in exports with the major markets. 3. Exports from non-State enterprises and imports by foreign-funded enterprises Exports by non-State enterprises exclude foreign-funded enterprises. There has been enormous increase in these exports. Imports with foreign funded enterprises also picked up speed. A major factor leading to such a big rate of growth was the rapid growth of imports for processing trade. Imports by foreign funded enterprises for processing businesses accounted for 60 per cent of the total imports made. Another factor was the growth of the import of equipment and articles by foreign funded enterprises as investment.

4. Regaining growth of exports from the western region There has been fast speed growth of exports from the western region. Though some provinces and autonomous regions show decline, overall there has been a high growth. The reason for this is the exports of certain bulk commodities of resource character from the region had increased. 5. Further improvement of composition of foreign trade The composition of import and export commodities was further optimized. The proportion of exports of electro-mechanical and hitech products against the total exports of the country has increased. On the other hand, imports of commodities of a resource character and industrial products of a raw material character in short supply at home grew at a comparatively fast speed. This accounted for 40% of the total imports. Exports of a general trade character, a major source of foreign exchange revenues from exports, grew rapidly. Foreign exchanges earned from foreign trade have become a major source and guaranteed the steady growth of China's foreign exchange reserves. Import-related taxes have become a major source of growth of the tax revenues in China.

Prospects For Foreign Trade Development In China

1. Basic environments for China's trade of imports and exports At present and for some time in the future, both the domestic and the international environments, as a whole will be favorable for the development of foreign trade in China. At the same time, however, some uncertainties and striking difficulties lie ahead. 2. Briskness of demand at the international market. There will be over all increase in the exports of the country. The growth rates of the imports and exports of all the member countries of the European Union has been on the upward trend and is expected to be so in the future too. 3.Development of a major turn for the better of the domestic economy Thanks to the implementation of an active financial policy and a steady monetary policy, and vigorous promotion of strategic

readjustment of economic structures, growth of the Chinese economy has started to pick up once again since the beginning of this year. According to figures published by the State Bureau of Statistics, China's GDP grew by 8.2 per cent. With the start of implementation of the new five-year plan, both investment and demand are expected to heat up further. All these will provide excellent preconditions for the continuous growth of China's imports and exports. 4. Maintenance of stability of the State policy encouraging foreign trade development. The State has reformed and perfected its policies and measures to encourage the development of foreign trade in recent years, and these policies and measures will remain unchanged in the future. At the same time, the State will continue to investigate, punish, and crack down upon behaviors including illegal remittance of foreign exchanges, exchange arbitrage, smuggling, and obtaining of export rebates by deception for the purpose of maintaining the normal order of foreign trade. All these have created a favorable external environment for the development of foreign trade and given a vigorous push to the growth of imports and exports. 5.Further acceleration of the pace of reform and opening-up. Negotiations over China's membership in the WTO have entered their final stage. China's admission into the WTO will usher in a new era of the country's opening-up drive, facilitate improvement of the country's environments for the utilization of foreign investment, strengthened the confidence of foreign investors, and lead to further improvement of the quality of the country's utilization of foreign investment. With the acceleration of the pace of reform and openingup and the continuous advancement of efforts in structural readjustment and regrouping and transformation of enterprises at home, enterprises other than those owned by the State will gradually develop and grow into an important force participating in international competition. There are also some problems, however, that can not be ignored because they will affect foreign trade development in China at present and for some time in the future.

6. Possibility of development of regional financial upheavals cannot be excluded. Because some factors of uncertainty still exist in the growth of the world economy and the in-depth problems haunting the financial

industries of some regions have not yet been fully solved; the world oil prices will remain at a high level for some time to come; and the unevenly geared pace of development of the economies of different countries will lead to the continuous weakening of the Eurodollar and further increase of the trade deficits of the United States. 7. Protectionism of every description still haunts international trade, and protectionist practices against China tend to gain new ground. In the third place, China's tasks in the field of purification of foreign trade environments are still extremely arduous. The illegal behaviors of a small number of enterprises such as smuggling, exchange arbitrage, and obtaining of export rebates by deception have seriously affected the country's normal order of business operations; clumping at low prices China's national interests as a whole and stained the reputation of China-made products; and no effective solution has been found yet for die random imposition of charges and fees at various links during the process of conduction of imports or export.

Forecast of China's situation of imports and exports in 2000 and 2001

Provided that no undesirable changes take place in the current environments of the international economy and trade, that the domestic macro policies remain stable, and that its national economy continues to grow, China will achieve this year such a high-speed growth in both imports and exports it has seldom achieved during the years since its initiation of reform and opening-up policy. China's growth of imports and exports will fall back somewhat next year from the figures of this year, but will still maintain its momentum of growth at a fairly fast speed. By taking various kinds of factors into consideration, we have made the following forecasts: China's total volume of imports and exports this year will grow by about 26 per cent from last year to stand at US$455 billion. Of this, exports will grow by about 23 per cent from 1999 to reach US$240 billion. If this is achieved, it will greatly outgrow the target set in the 9th Five-year Plan for bringing the country's total volume of imports and exports to US$400 billion including US$200 billion worth of exports by the year 2000. In the year 2001, China's total volume of imports and exports will increase by about 8 per cent.

Economic Restructuring
The Third Plenary Session of the CPC 11th Central Committee, held in 1978, made the decision to shift the policy stress to socialist modernization, and implement the strategic decision on reform and opening to the outside world. The reform began in the countryside: The contracted household responsibility system linking remuneration to output and the two-layer management system featuring the integration of centralization and decentralization began to be implemented; centralized and assigned purchases of agricultural and sideline products were gradually eliminated, and controls on the prices of most agricultural and sideline products were relaxed; the adjustment of the industrial structure in rural areas, the development of diversified operations and township enterprises mobilized the peasants' socialist enthusiasm for production.

The Third Plenary Session of the CPC 12th Central Committee, held in 1984, adopted the Decision on Restructuring the Economic System, which signaled the elevation of the reform of China's economic system to an urban-centered stage. The 14th National Congress of the CPC held in 1992 established Deng Xiaoping's theory of building socialism with Chinese characteristics as the guiding policy in China and put forward the goal of China's economic reform as establishing a socialist market economy system. Its principal contents may be summarized as follows: Adopting a series of macro-adjustment and control measures to carry out the reform in depth and in all aspects, public ownership will continue to be the main form of ownership as various types of ownership are jointly developed; the operation mechanism of state-owned enterprises will be further transformed to meet the requirements of the market economy; the property rights and responsibilities of enterprises will be clearly defined, the functions of the government separated from those of enterprises, and enterprises scientifically managed; an open an unified national market system will be established, closely integrating urban and rural markets, providing for reciprocal flows between domestic and international markets, and promoting the optimization of resource allocation; changing the government's function in economic management and establishing an optimal macro-regulatory system chiefly employing indirect means; an income distribution system based on distribution according to work will be established in which efficiency is given precedence and fairness in distribution is taken into account' a multi-tier social security system will be set up to accelerate the development of China's economy. The 15th National Congress of the CPC, held in 1997, put forward the viewpoint that the non-public-ownership sector is an important component part of China's socialist economy. Encouraging essential production factors, such as capital and technology, to participate in the distribution of gains enables the reform of China's economic system to take bigger steps. By 1998, the reform had gone smoothly in every aspect, and important progress had been made in solving some difficult problems. For instance, much work had been done to deepen the reform of the grain circulation system, the reform of state-owned enterprises and the reform of the banking system, and new achievements had been made. Reforms had been proposed for the housing and medical insurance systems; and plans for the reform of the investment, banking, financial and taxation systems were being formulated. The institutional

restructuring of the State Council has been going smoothly and has achieved important results. Now, China's socialist market economy system is being set up, the basic functions of the market in resource allocation have been obviously strengthened, and the initial framework of the macroadjustment and control system has taken shape. Moreover, the form of economic growth is changing from the extensive to the intensive type. By 2010, China will have established a comparatively sound socialist market economy, which will be comparatively mature by 2020.

Establishment of the DiversifiedOwnership Economy

Before the introduction of policies of reform and opening to the outside world, China had a unitary public ownership economy, which lacked vitality. But since the putting into practice of the reform and opening to the outside world, the Chinese government has encouraged the development of diversified economic elements while insisting on the primacy of public ownership. As a result, both the individual and private economies have developed rapidly. By the end of 1997, the registered industrial and commercial enterprises of individual and private ownership amounted to 29.47 million, and they had 65.87 million employees; Chinese-foreign joint ventures, Chinese-foreign cooperative enterprises and foreign ventures numbered 236.000, absorbing 303 billion yuan in foreign capital; registered joint-stock and joint-stock cooperative enterprises numbered 680,000, with 1,730.2 billion yuan in capital. The development and expansion of these enterprises have played important roles in many aspects, such as bringing convenience to people's everyday lives, making up for the deficiency of construction funds, and introducing advanced technologies and management from abroad. At the same time the control of the public ownership economy has been further strengthened. In 1997, the gross domestic product turned out by the public-ownership economy amounted to 75.8 percent of the total GDP. Now the mutual development pattern for diversified ownership with the public ownership economy as the mainstay has been basically formed.

Savings and Investment in the PRC

One of the most prominent characteristics of the PRC's economy has been its people's high propensity to save. This has occurred more as a result of a lack of consumer goods than a genuine desire to save, however. During the 1980s average gross domestic saving as a percent of GDP was 32.5% - higher than any other country in Asia - and during its peak in 1990, gross domestic saving in the PRC reached 39.2%. Coupled with this, as been a high propensity for the government and TVEs to reinvest in capital construction projects. Except for 1990 and 1991, gross domestic investment as been consistently higher than gross domestic savings - with an average of 34.6% of GDP during the 1980s. Again - as with gross domestic savings - gross domestic investment, as a percentage of GDP is higher in the PRC than anywhere else in Asia. Graph 8 displays the recent trends in the PRC's savings and investment ratios. As depicted, there has occurred in the PRC a general trend to save more and invest less, with the differential between savings and investment of 4.8% of GDP in 1985 being narrowed to zero in 1992. The situation occurring in 1990 - where savings reached 39.2% of GDP - is unlikely to continue. As previously discussed, 1988 - 1990 represented a period of strictly enforced austerity measures in the PRC, and severe shortages of consumer items meant that there was even less for Chinese citizens to spend their savings on than usual. It is likely that high levels of gross domestic savings and investment will continue into the foreseeable future. Only when the PRC's manufacturing sector can cope with the domestic demands of one billion people will be any significant change in savings rates. Until that time, as the PRC government and TVEs continue to invest in capital construction projects, gross domestic investment will also continue to take up a sizeable share of GDP.
Savings and Investment in the PRC

The Socialist Market Economy

Since 1978, along with the dismantling of the planned economy system and the deepening of the reform of the economic system, commodity, capital, labor service and technology markets have appeared one after the other in China. Now China has transformed its planned economy system into an initial socialist market economy system. As a result the regulatory function of the market has been strengthened considerably.

Commodity Market:

In order to extend the regulatory function of the market, the state has gradually reduced the categories of products for planned production, eliminated the restriction that enterprises were only allowed tn engage in production but not in business operation, and abolished the practice of the state fixing the commodity prices. As a result, the rights of the enterprises to purchase, produce and sell have been extended. Enterprises may organize and establish wholesale markets and trading centers; the wholesale and retail commercial systems are being restructured; and the non-public economy is allowed to take part in commercial activities. Through the reform, the unitary pattern in which the public economy monopolized commercial activities has been broken up step-by-step, and the commodity market pattern of diversified economic elements and operation forms with the public ownership of commerce as the main body has been established. Before 1978, there were 791 products belonging to means of production allocated according to state plans, but now only five of them remain, and the rest have entered the market. Now, thousands of department stores, supermarkets and chain stores are scattered everywhere in both rural and urban areas. A great variety of food, clothing and other commodities satisfies the needs of consumers. The total market sales grow with each passing year. in 1998, the rural market achieved 1,132.7 billion yuan-worth of sales of consumer goods, 12.9 times the figure in 1978; the urban market achieved 1,782.5 billion yuan-worth of sales of consumer goods, 23.8 times the figure in 1978. At the same time a buyer's market has appeared in the commodities sector in which the supply

and demand of most commodities are kept in balance, the supply of some gods exceeds the demand, price trends are steady and the guiding function of the market for producers has been strengthened.

Price Reform:

Before the reform and opening was introduced, most commodities on the Chinese market were priced by the state. But since the start of the reform and opening, along with the expansion of the commodity market scale and the change of the relations between commodity supply and demand, the state has carried out price reform step by step and according to plan. The fixing of prices by the state follows three forms: the fixing of price by the state, state guiding prices and market regulatory prices. The market regulatory price has been gradually relaxed - by 1998 the pricing of 95 percent of consumer goods and 80 percent of investment goods had been relaxed. These prices were regulated mainly through the relations between market supply and demand. A socialist market pricing mechanism is gradually taking shape. In the pricing system the irrational state of basic product prices being too low has been improved, and the pricing structure is becoming more rational, step-by-step. Comparing 1997 with 1978, the prices of minerals, raw materials and manufactured products increased 8.2, 5.2 and 3.3 times respectively, and their price ratio was 1.7:1:0.6. Besides, the price scissors in the exchange of industrial products for agricultural products were alleviated. In 1997, the prices of agricultural products increased by 5.25 times, compared with those of 1978, and the prices of industrial products by 2.95 times, and their price ratio was 0.6:1. In accordance with the requirements of the socialist market economy, China has been establishing a pricing mechanism macro-regulated and controlled by the government, and fixing prices through the market.

Capital Market:

Since the reform and opening began, China has continuously expanded the capital market by improving the credit and loan mechanism, and developing stock and state debt markets. At the beginning of the 1980s, the reform of the credit and loan mechanism, beginning with "unified plan, multi-level control, connection of deposits with loans, and being responsible for making up differences" developed in accordance with the ratio between assets and debts, and eliminating the limits for the sizes of loans, re-discounting, reserve fund rates and making market business public, thus standardizing and strengthening the control and adjustment of the credit and loan market.

The Trend Towards A Coordinated Economic Structure

Before1978, China's economy had a weak foundation in agriculture, and the ratio between light and heavy industries was unbalanced. Since 1978, China has adopted a series of policies and measures giving priority to the development of light industry, expanding the import of top-quality consumer goods, strengthening the construction of basic industry and facilities, and devoting major efforts to developing tertiary industry, so as to make China's economic structure more coordinated, optimized and balanced. The relations between different industries and within industries in terms of proportion have clearly been improved; the proportion of primary industry has declined, while that of the secondary and tertiary industries has grown; the growth of the overall national economy was driven formerly by the primary and secondary industries, but now it is being driven by the secondary and tertiary industries. Actually the growth of secondary industry becomes the main engine of rapid development for China's economy. While the whole industrial structure is changing, the internal structure of every industry has also changed greatly. In the total output value of agriculture, forestry, animal husbandry and fisheries, the proportion of pure-agricultural output value has declined, while that of forestry, animal husbandry and fisheries has grown; the structure of light and heavy industries has escalated from the light pattern structure stressing "consumption compensation" to the heavy-pattern structure of "investment guidance"; within the tertiary industry the proportion of the traditional industries, such as communications, transportation and commerce, has declined, while real estate, banking and insurance, and telecommunications, have developed rapidly.

Chinese Economy Faces 5 Major Challenges

China has maintained rapid economic growth so far this year despite the overwhelming slowdown in the rest of the globe, but there are still many outstanding challenges and difficulties posed for the Chinese economy.

The most serious problem China confronts at the moment is the harsh international economic situation, the impact of which is coming to be felt here. The U.S. economic slowdown since the second half of 2000 has resulted in a drastic decrease of imports by that country, the Japanese economy is on the verge of recession again, the EU is under attack from both economic slowdown and inflation, and China' s neighboring countries are also suffering from lack of growth. All these factors have contracted the demand for Chinese exports, and currency devaluations in some countries have undermined the competitiveness of Chinese goods in terms of prices. As a result, China's export growth rate fell 0.6 percent in June, compared with a 13.7 percent increase in January.

Five major difficulties and challenges for the Chinese economy:-- Farmers' income growth is slowing because of structural problems in rural economy, which has become the most aggravating issue for national economic development; -- Conflicts between domestic demand and supply are mounting, as farmers remain relatively poor, the number of low-income city dwellers is on the increase and manufacturers are restrained by limited investment in products that meet the market demand. In addition, the labor-intensive service sector is still under- developed; -- More workers may be laid off as exports contract; -- China has suffered from drought for two consecutive years, and droughts in many provinces this year have been the harshest in the past few decades. - - Irregularities in the market order and the frequent occurrence of major industrial accidents are also posing threats to the normal operations of the economy and social stability.

China and World Organization (WTO):

Trade

The establishment of WTO as a successor of GATT on 1 January 1995 under the Marrakesh Agreement places the system on a firm constitutional footing with the evolution of economic legislation resulted through the Uruguay Round of GATT negotiations. After 15 years of negotiations, China and the United States signed an agreement on November 15, 1999, paving the way for China's entry into the World Trade Organization (WTO). On May 19, 2000, China completed negotiations with the European Union (EU). Admission procedures in Geneva soon began after China finished negotiations with a handful of remaining countries. Finally in December 2001China became a full fledged member of the WTO. We would now see the reforms of China before entering WTO and after entering WTO in a comparative format.

Before entering The WTO:Since China has yet to enter WTO, the quotas specified in the MultiFiber Agreement (MFA) are still in use. Therefore, more than half of China's exports to the US and roughly half of China's exports to the EU face non-tariff barriers. In recent years, the US has imposed new quotas on China's silk products. The EU has already imposed new quotas on products such as shoes, toys and kitchen utensils manufactured in China.

After entering The WTO:When China enters the WTO, these quotas will be removed and Chinas exports are expected to rise. A recent study shows that Chinas entrance into the WTO will noticeably increase Chinas share of the global garment market. China currently holds 17% of the global garment market. Product Garment Before entering WTO 18% After entering WTO 44% Percentage increase 144%

market Textile market Metal market Other products

5% 3.5% 8%

8% 5% 10%

60% 42.85% 25%

According to the study, by 2005, Chinas share of the market will increase by 4.6%. Though these are rough estimates, it is still clear that Chinas exports will increase after its accession to the WTO and the elimination of restrictions imposed by multi-lateral agreements. This accession will bring increased choices for Chinese consumers. Chinese consumers will face increasingly more choices for commodities and services in areas such as farm products, automobiles, bank services, insurance services, telephone services and Internet services. It is widely accepted that, in the long run, Chinas profit from entering the WTO will be roughly equal to 1% - 2% of annual GDP. These profits will lead to increased job opportunities, which will accompany the shift of resources from capital-intensive pursuits to labor-intensive pursuits. Most jobs will be created in the textile, garment, electronics, meat processing, dairy products and service industries.

Custom duties and telecommunication:Between 1992 and 2000, the average import customs duty dropped from 43% to 17.5%. China reduced import customs duties on industrial products from 45% to 17% and on basic products including raw materials and farm products from 36% to 18%. In addition, China has substantially shortened the list of taxable products. The standard deviation of tariffs has also dropped from 32% to 13%. Through tariff reductions, the government has already lowered import customs duties to zero for nearly 75% of all imported products. Among the items which make up this 75%, 50% are processed products, 10% are produced by joint venture invested companies, 55% gained their duty free status through bonded warehouses and 10% fall under other customs-duty exemption policies. Although China's reform of customs duties in the 1990s lowers the price China will pay to enter WTO, the economy will still face challenges in the coming years, particularly in such industries as agriculture, automotive, banking, insurance and telecom.

Not until the first half of 1999 did China cease its absolute monopoly over the telecom industry. China Telecom, owned by the government, controlled most enterprises involved in fixed-line telephone services, mobile services and network provision. Although this absolute monopoly was loosened slightly by the government when it broke China Telecom into a small group of service providers, China's telecom industry will still face tough challenges when China enters WTO. One the positive side, this industry is going through vital changes. Rapid development in this industry has brought the number of fixedline telephone users in China to about 110 million (i.e. on average, there are 13 telephones for every 100 people in rural areas and 28.4 telephones for every 100 people in urban areas), 430 million mobile phone users, 10 million Internet users and 150 million Internet portals. The numbers here show that development in this industry is noticeably more rapid than in most other industries. Along with the popularity of the Internet, profits in the telecom industry have been slashed.

Foreign trade and investment

As the world's ninth largest exporter, China's accession to the WTO is deemed positive to the Chinese economy and the impact is expected to be long term. Apart from fully incorporating China into the international trading system, China's WTO membership would provide a multilateral platform for the country to resolve trade disputes with other member countries, giving China more protection against unilateral sanctions by aggrieved trading partners. As a member of the WTO, China could also participate in global trade talks to counter possible changes in international trade rules that may be unfavorable to the country's exports. To enjoy the benefits that come with the WTO membership, China will have to gradually phase out the protectionist policies that have shielded its enterprises from foreign competition in the past years. Upon entry to the WTO, China will have to cut import tariffs and open up its markets. The sharp reduction in tariffs and non-tariff trade barriers would inevitably lead to a surge in imports and a reduction in China's trade surplus. The extent to which China's trade balance could deteriorate should, however, not be exaggerated, as trade barriers will only be let down gradually. Increased inflow of foreign investment would also help offset the negative impact on the balance of payments position resulting from the faster growth of imports. The bilateral trade agreements reached between China and other WTO member countries focused mainly on the elimination of protective trade policies by China and the gradual relaxation of controls on

foreign investment. In accordance with WTO rules, all WTO members will enjoy the concessions that China offers to any other member country after China's accession to the WTO. On reducing trade barriers, China agreed to cut average tariffs on agricultural products from 31.5% to 14.5-15% by 2004. Average tariffs on industrial products will be reduced from 24.6% in 1997 to 9.4% by 2005, by which time the 13.3% tariff on high-tech goods will also be abolished. Non-tariff protective measures such as import quotas on industrial products will also be phased out within five years. On relaxing controls over foreign investment, China has agreed to gradually open the highly protected sectors such as financial services and telecommunications to foreign participation. Upon entering the WTO, for example, foreign companies are allowed to own 25% stake in mobile telecommunications ventures and 50% stake in insurance business. Foreign ownership in mobile telecommunications ventures could be raised to 49% after three years, while foreign equity restrictions in the insurance sector will be lifted in five years. Five years after China's entry to the WTO, all geographic and customer restrictions on foreign banks will also be removed.

Impact Of WTO On China

In a speech titled "An Open China, A Bright Future," the minister said: Chinas accession to the WTO is a major event of historic significance to Chinas opening up and modernization drive. It demonstrates the firm determination of the Chinese government to further deepen reform and open wider to the outside world; it also fully testifies to the positive posture China has adopted toward active participation in economic globalization and integration into the mainstream of world economy. Chinas accession will undoubtedly bring profound change and impact to the prosperity and development of the Chinese economy and the world economy at large. Impact: WTO accession will further improve the market mechanism in China. The WTO is a market-based organization whose rules reflect the general principles of a market economy. [This general acknowledgement of the WTOs rules represents a rebuttal to the view that the WTO is a club of the rich.] WTO rules will serve as a useful reference for China and will help China draw on the experiences and

practices of other member countries in managing their economy, and regulate trade and investment. Chinas policy and regulatory environment will be more stable, consistent, transparent and predictable. Chinas National Peoples Congress has already approved the newly revised laws governing Sinoforeign equity joint ventures, contractual joint ventures and wholly foreign owned enterprises; the State Council has sorted out 2,300 laws and regulations in connection with WTO accession, of which 830 will be annulled after entry and 325 revised. Chinas market will be more unified and open. The country will gradually liberalize banking; insurance, telecom, retail, logistics, construction, tourism and agency services, and geographical restrictions will be phased out. A unified, open, competitive and orderly market will emerge. Administrative management will be more standardized and efficient. Law will bind government behavior and administrative approvals will be reduced. Local protectionism and industrial monopolies will be broken, forgery and counterfeiting cracked down upon, and intellectual property rights protected. Chinese enterprises will gain a fair international competitive arena under the principle of multilateral, stable and unconditional granting of the most-favored-nation status. China will be able to participate in international trade rulemaking and call on the organization's disputesettlement mechanisms. China will make new headway in trading with neighboring and Asian countries. China will inject new vigor into the world economy. In 2000, the Chinese economy grew by 8 percent -- its gross domestic product (GDP) topping $1 trillion for the first time -- making it the sixth largest in the world. Foreign trade amounted to $474.3 billion, the seventh highest in the world. At present, more than $100 million in foreign direct investment (FDI) flows into China every day. In the next five years, the Chinese economy is expected to grow an average of 7 percent. By 2005, China's GDP will hit $1.3 trillion and foreign trade $650 billion. Annual inflow of FDI will average $40 billion. Initial estimates show that during the 2001-2005 period, China will import $1.4 trillion worth of equipment, technology and products.

One year after working within the WTO framework:It has brought positive results to the Chinese economy.

The Chinese government had largely transformed its functions and improved its administrative capability since the China's WTO entry. The commission had cleared 113 departmental regulations issued before 2001 and established new ones. It had also begun to formally publicize its policies and regulations both at home and abroad this year to increase political transparency. Since entering the WTO, China had accelerated industrial restructuring. It had invested a total of 207.6 billion yuan (25 billion US dollars) in technical innovation projects. It had finished regrouping the civil aviation and telecommunication industries into corporations and was regrouping the power, railways, and non-ferrous metals and gold industries. China took more safeguarding measures in anti-dumping and antisubsidy campaigns, registering a total of 10 anti-dumping cases worth 59.2 billion yuan (7.1 billion dollars). The relevant businesses had also learned to calmly face trade disputes within the framework of the WTO and protect their legal rights.

Conclusion
Since1820, Chinas economy has been declining. Some of its effects are that its per capita has become only 11% of that of U.S.A. with an annual income of around 200 dollars. Whatever might be the reasons but China faced an era, which was full of poverty, illiteracy, and under development.

Reasons for decline:There are three reasons for the decline of Chinese economy. They are as follows: During the period of industrial revolution in Europe, China practiced a closed-door policy and isolated itself. This caused China to lose the chance to learn from others and this resulted into a very slow technological revolution. From 1840 to 1949, China had to face internal rebellions, wars and intrusions of other countries. It had to pay many financial fines to the English, the French and the Americans for forbidding the trading of opium and tea. Then there were wars with Japan, the Taiping rebellions and the Boxes war. As a result, China lost

around millions of dollars and Chinese people realized that a truth: backward will take a beating. After new socialist China that was established in 1949, Chinese government policy encouraged couples to have many children. This led to population explosion, which resulted in the downfall of the economy. (In 40 years population grew from 200 millions to 1400 million people)

Future prospects:Despite of the sluggish economic situation elsewhere in the world, the Chinese economy is expected to keep growing at the rate of around 7% for next 5 years. In order to attain a steady growth the following developments are expected to be achieved. More highways and roads of around 2,00,000 kms with a total investment of 200 Yuan ($ 24 billion). Ambitious railway plans like building new railway network and reconstructing the old ones including an express rail line connecting Beijing and Shanghai would start soon. Airports, deep water berths, power stations will be built for rural areas, thereby increasing the oil and natural gas exploration capacity from 37 billion cms to 95 billion tones by 2005. We hope that this Huge Dragon in the east of the world will be awakened and go up with courage to catch up with other advanced countries.

Hindi-Chini Bhai-Buy
Most of India has always viewed China as a competitor, and not as a market. Perhaps this adversarial relationship goes back to the war we fought and the Indian Territory that China still occupies. India's twin obsessions of politics and Pakistan have put India much behind China in the game that China has understood very well: tomorrow's battlefield lies in economics, not politics. India had begun well in 1991, but somewhere along the line, we went slowly as China powered ahead. Yet, tomorrow will bring its own set of opportunities. That is how India needs to see China: as a new market, which Indian entrepreneurs need to look at as they expand beyond India's boundaries. If the past decade was about looking West (to US and

Europe), the next decade will be about looking East (to China and the other countries in the region). India may have missed the manufacturing bus to China, but it can build a services base. These beginnings have already been made. Today, just as China is being discussed globally for manufacturing, India is very much on the agenda for outsourcing software and services. This is one of the core strengths around which India needs to become part of the global supply chain. Just as Chinese companies seek to flood the Indian market with their low-priced products, India can make China a part of the Indian services orbit by leveraging its strengths in English, execution and relationships built with the global companies. China's uniformity has worked well as it has become the workshop of the world; India needs to make its diversity work as it seeks to become the back-office to the world. Indian companies need to understand China better. They need to start setting up offices there - not just for liaison or for "demonstrating a China strategy", but for full-fledged business. It will mean learning the Chinese language and understanding the local culture. The two countries may seem similar and there is always a desire to seek comfort in what is alike between the two countries and its people. But the reality of the past 50 years cannot be overlooked - China's communism and India's democracy are realities which need to be remembered as one considers the markets and attitudes of the people. A good example of an Indian company, which has expanded into China, is contests2win (c2w), which helps companies in their brand building efforts with consumers through contests and games. c2w started off as a child of the dotcom era in India. But it has not only built a large following in India, but also last year expanded into China. It is using the head start China has in its Internet base (5-6 times that of India) to build an early lead into new, emerging markets and technologies. Other Indian companies who have already built a presence in China include Aptech and NIIT on the IT education front. China is a competitor, but it is also an opportunity and a very big at that for Indian companies, if we are prepared to look at it that way. Walk through the Shanghai Museum and see how a first century AD export from India has made a deep mark across China. That export: the teachings of Buddha. Now, two thousand years later, India needs to learn and do the same. Our software, services, and even our films can be good starting points. US, Europe and Japan may offer the comfort of past successes, but there are fortunes to be yet made targeting the "bottom of the enterprise pyramid." No pyramid base can be bigger that the combined markets of India and China.

Competing Solutions
China and India, which together are home to a third of all people on Earth, are moving from decades of confrontation to a new relationship of cooperation that will have global impact. Indian Prime Minister Atal Bihari Vajpayee has produced a promising set of agreements to help settle a long-standing border dispute, increase trade and decrease mutual distrust between the two giant Asian nations and their combined populations of 2.2 billion people. Both countries fought a border war in 1962, leaving a sense of suspicion and tension between them that lasted for years. Diplomatic relations were reinstated in 1976, but each nation has retained thousands of troops along disputed borders, and is armed with nuclear weapons. In fact, India's 1998 nuclear tests were initially interpreted as a hostile maneuver aimed at China. The situation was exacerbated by the Indian defense minister's statement that China was India's main threat. But in the last few years, both countries have slowly come to the conclusion that their national interests can be compatible. When asked, many leading officials and scholars in both countries say that remaining disputes on borders and Tibet are not worth a war. As neighbors with huge populations, high poverty rates and weak economies, China and India face many common problems. Increasingly, working together appeals to the leaders of the two nations as the best way to tackle these problems and resolve their disputes. With the decline of the communist ideology, Chinese policy-makers note that a political philosophy that can unify the state is absent. Securing its external borders and relations with neighboring countries allows China to focus on growing internal problems. Indian policy-makers are less concerned than their Chinese counterparts that ethnic or economic forces could threaten the unity of their nation. In fact, Indian leaders overwhelmingly state in interviews that the unity of the Indian state does not hinge upon keeping Kashmir. In contrast, most Chinese policymakers say a separation from Taiwan could mean the end of China, as we know it. Rather than worrying about the country disintegrating, India is trying to refocus its national efforts on economic growth to match China's success. Indian growth rates have averaged 6 percent in the past decade, but growth needs to be even faster to eradicate poverty and raise living standards.

Conflict and tensions with neighboring China and Pakistan have posed a large economic hurdle for India in the past, impeding foreign investment and absorbing critical budgetary resources. Moves by Mr. Vajpayee's government to foster ties with Pakistan complement his recent initiatives in China, and could eventually lead to a significant demilitarization of India's northern borders. Whereas a decade ago, trade volume between India and China was a paltry $300 million per year, it has now increased to $5 billion annually and is growing. Of course, the field of competition has also shifted to economic interests. India eyes with envy China's rapid growth rates and competitiveness in the consumer goods sector. China, for its part, is hoping to emulate India's success in the information technology arena. With common strengths and export markets, trade competition is inevitable. But a fight on economic terms can do both countries good. The implications for U.S. foreign policy are far-reaching. Although India's close relations with the United States will remain a priority, maintaining positive ties with China will probably be increasingly important to ensure future security. A warming of ties between India and China also means that America needs to understand that China, India and Japan could work cooperatively in the future, and attempts to play off India against China may be unlikely to bear fruit. At the same time, the new closeness between India and China means that the United States can worry less about an outbreak of nuclear war between the two that could kill millions of people and throw the world into turmoil. Instead, America can refocus on working with the world's two most populous nations on mutually beneficial economic and strategic relationships that will benefit people in all three nations and much of the world.

How Chinese Dumping Hits FDI Flow To India

THE dumping of Chinese goods is not only threatening India's domestic industry but is also likely to affect foreign direct investment (FDI) flows. The dragon has cast its shadow even on the domestic industries of developed nations such as Japan. Both India and Japan are on their feet to counter the dumping, but their approaches are different. While India is using anti-dumping measures and tariffs to shield its domestic industry, Japan is using economic measure -- that is, by investing more in China to produce and sell to its own domestic market at half the price of similar products produced in Japan. For instance, Japanese apparel major, Itokin Co, exported 17-18 million pieces of garments from China to Japan in 2000, treble the 1999 figure. In 2000, other leading Japanese apparel companies -- Fast Retailing and Cecile -- set up shop in Shanghai to produce low-priced apparels for export to Japan. Thus, Japanese apparel-makers have increasingly been relocating their manufacturing base to China to capitalize on the cheap labour and nullify the latter's competitive edge in the Japanese market.

To counter the dumping, the US and Europe may also take Japan's route -- by investing more in China, that is. What does this imply for India? Going by the current trend, and coupled with its imminent entry into the WTO, China will once again become an attractive destination for foreign investments. Structurally, since the mid-1990s, China's production base has become more technologically advanced. During its early years of open policy, most foreign businesses investing in China were labour-intensive, medium/small-scale processing enterprises. But in the past five years, with the entry of a large number of multinational corporations, FDI has played a big role in promoting China's technological progress. More than half the enterprises in hitech industries, such as electronics, automobiles, pharmaceuticals, telecommunications equipment and engineering machinery, are foreign firms. As a result, these firms have emerged as the engine for China's hi-tech exports. China has, since 1998, stepped up its efforts to encourage foreign investments into technology development and innovation. Several incentives, such as import duty exemption for equipment and technology brought into China by foreign-invested research companies, tax breaks for incomes obtained from transfer of technology, and business tax exemption to foreign enterprises transferring advanced technology, are luring foreign investors to China. Of course, the certainty of China's accession to the WTO is a major reason for the return of their foreign investors. This would mean opening up of China's high-potential service sector -- such as retailing, wholesaling, banking, insurance, information technology, and telecommunications as also professional services of accountancy, and management consultancy -- to foreign investors. The service sector accounts for one-third of China's GDP. On the contrary, in its decade of liberalization, India has failed to provide a competitive manufacturing base to MNCs -- neither for their export efforts nor to meet the needs of the large middle-class market. Attention has been paid largely to the development of the software sector. Foreign enterprises have, therefore, hardly made any effort to use India as their production base for exporting to their own countries. Global integration means development of borderless production to cater to the needs of both the domestic and export markets. In this changed situation, if India wants to compete with China, it will have to

strengthen its manufacturing facilities. But this is not easy. Hence, the only alternative would be to open up its service sector more boldly, that is, well before China does so after gaining WTO entry. India, for instance, has a vast potential to attract FDI into retail and wholesale trading. Following the removal of the QRs and the gradual reduction in tariffs, the distribution industry has emerged as a highpotential area for investment. Considering India's size and the diversified nature of its regional markets, the domestic private sector alone cannot pump in the investment required. Hence, foreign investors should be encouraged to supplement the enlarged distribution industry with resources and technology, rather than be paranoid about protecting the domestic players.